Property Price Crash - Mirage In The Desert!

"Real Estate prices may crash up to 20%", Screamed Economic Times quoting Mr. Deepak Parekh, Chairman of HDFC.

"Sell unsold units at No Profit No Loss Basis", Howled Business Standard attributing the quote to Mr. Nitin Gadkari, Senior Minister of central government.

"Reduce prices and sell the inventory", Wailed CNBC TV, making Mr. Uday Kotak, banker and CII president, responsible for this quote.

"Cut prices and clear unsold stock.", Yelled The Hindu, keeping the gun on the shoulders of Mr. Piyush Goyal, Senior Minister of central government.

The common factor between these four gentlemen is that none of them are from Real Estate industry. Some advised the developers to simply reduce the prices, the others advised them to almost convert their business into a NGO, albeit temporarily.

Classical example of Blacksmith advising Goldsmith, or vice versa, how to run business.

We have been hearing about Real Estate Price Correction since last 10 years. To the utter dismay of people who were genuinely in need of a home, the wait for correction ended up in they buying home at double the price.

For the benefit of common man, let me lay bare open few important elements that determine the pricing of Real Estate. Real Estate Market is completely different from Stock Market and Gold Market. A Scrip on Stock Market can skyrocket without any fundamentals and a scrip with best credentials can crash at the sneeze of top management. Similarly, even a faint rumor of war can send the Gold prices to sky high. However, Real Estate Prices are driven by input costs. Let me disentangle this one for you.

Every project in Real Estate is an assembling unit and not a manufacturing factory. Further, each project is different from the other. And therefore, a Real Estate project is made up of as many as 250 to 300 types of materials. From a small nail to a giant elevator, from a small switch to a massive STP, everything is assembled on a piece of land, which itself being the biggest and costliest material.

let's navigate through the haze and maze of Real Estate Pricing.

LAND COST:

This is the most important component of Real Estate industry. Sadly, as a customer you focus only on what is built on it for you. Let me remind you, developer doesn't determine the land price. Did you know that the land cost constitutes 40% to 60% of the total project cost? Demonetization was expected to cool down land owner's expectations. Unfortunately, neither it has affected the appetite of land owner nor it has impacted the Ready Reckoner rates of the Government.

LABOUR COST:

Generally, a customer doesn't realise that labour is 2nd most important element in Real Estate industry. The recent spotlight on migrant workers has certainly highlighted the importance of labour in construction industry. But did you know that labour constitutes as much as 35% of the total construction cost? And post COVID-19 the cost of labour has gone up by 100% due to acute shortage. The impact will be massive.

MATERIAL COST:

Cement prices have gone up by 50%. Steel prices have gone up by 25%. Prices of every other material has gone up by 20% to 30% due to shortage of supply and increase in transportation cost. All this has happened in the last 2 months.

Yes. All that goes up comes down, except prices.

This will directly affect the under construction projects. The developer will have no option but to include the additional cost to the selling price.

FINANCE COST:

The cost of funds in Real Estate has been 'make or break' factor in the recent years. In fact, it has attained the status of major cost centre. Cost of funds range from affordable 12% p.a. to astronomical 36% p.a. which is ultimately added to the selling price.

In the case of ready possession projects, the exorbitant cost of funds is already incurred. Price reduction will result in major loss and the loans will turn NPA, compounding the problems for all stakeholders including the buyers in the project.

APPROVAL COST:

Also known as Statutory cost. You will be surprised to know that, there is a tax beginning with almost every alphabet in English. And this cost is the heaviest on the developer. The less said the better.

A stock market analyst is never tired of telling you to buy the stock even when the market is at its historic high. But for the same analyst, a developer's price 'was' always high, 'is' always high and 'will' always be high. Specimen of double standards.

To conclude, the Real Estate price is arrived at, after taking into account all the costs. Gone are the days of super profits. This is a highly competitive and price sensitive market.

Established brands who always charge more, will have to re-visit their prices. For the rest, the stagnant prices for the last 4 years, have already done the needful.

For Developer:

Market Is Good If The Marketing Is Good.

For Customer:

Real Estate Is Not Only About Price. But Also About Value.

With Ever Increasing Costs, Property Price Crash Will Ever Remain As A Mirage In The Desert.

Real Estate ही Real है।